Regarding US monetary policy and financial markets, I am thinking about these factors:
the data on inflation, employment
the Fed's actual policy decisions
the Fed's language about past and future policy
the financial markets' reaction to the above 3
The data shows that CPI, PPI, PCE inflation and wages continue to decline.
The Fed’s statements during these rate increases have been hawkish (and I think rightly so as they need to err on the side of keeping inflation down), but their policy decisions are very data dependent (and they always say that their decisions will be data dependent - I wouldn’t want their decisions to not be data dependent!).
Similarly, the financial markets are responding to all of the above, but especially the data and what the data imply about what the Fed’s actual policy decisions will be, in a forward-looking way.
Most importantly for me, both the Fed and the financial markets are saying that the Fed funds rate will peak at roughly 5%. The markets and the Fed may differ by +/- 50-100 basis points or thereabouts on their forward outlooks, but does that relatively small amount really matter that much? Especially after going from 0% to almost 5% in about 1 year, which is historically a very fast increase?
For discounting cash flows for investing in public markets, I’m thinking for most normal cases, +/- 50-100 basis points or thereabouts is not a big deal as those effects are likely much smaller than sensitivities to other inputs (for example other inputs like an estimate of future cash flows for a business, which is can be very uncertain).
It’s not only the fed funds rate at the peak, which I agree will be about 5%. It’s also how long the Fed maintains this peak rate. In past Fed cycles since 2000, the Fed only held the peak rate for a short time before almost immediately cutting it to practically zero.
The Fed has stated that they will maintain the fed funds rate for an extended period until they are sure that inflation will not rebound. This will make a big difference to companies which will need to roll over their maturing debts at a higher yield.
I have tried to position myself so that the short term actions of the Fed and perturbations of the markets don’t matter. I am putting SS that I don’t need into the markets because I am already overweight cash and betting that equities will outperform my fixed income over longer timeframes - ten years or more.
They won’t say it outright, but I think this is only part of the reason. I think they also want to keep rates higher for longer so that they can use rate drops as a tool when they actually need to. In Wall Street parlance, “they want to make sure they have enough ammo” for the next recession. I also suspect that they would like to handle the next recession using only interest rate drops and not load up their balance sheet even more than it already is. At the -$95B/mo rate, it’ll take many years (about a decade) to bring it down to “normal”, and there almost surely will be some sort of recession during that time.
The optimization of corporate planners across the board will lead to greater economies of scale. Yes the efficient use of capital matters in this. Corporations live in an environment and need each other to thrive.
Those that are zombie corporations with a debt load will fail. Better yet their assets will be bought for pennies on the dollar increasing the longer term efficiencies we can see in this economy.
The bigger question is can we see a spread between the deposit yields and lending rates be maintained? I think we will see that as a normalization of the banking sector long term from here. That spread will naturally begin to insure against zombie corporate failures for the banks.